National HealthCare Corporation — FY2012 Form 10-K
Business context and period. Annual report for the year ended December 31, 2012; quarterly figures below include the unaudited fourth quarter. NHC operates or manages long-term care, assisted living, independent living and homecare services, and holds a 75.1% non-controlling interest in hospice provider Caris. At year-end, it operated or managed 75 long-term care centers with 9,460 beds. Its operations are concentrated in the southeastern United States.
Financial performance and position
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Net operating revenue | $761.3 million | $773.5 million | -1.6% |
| Income before non-operating income | $66.0 million | $77.3 million | -14.6% |
| Non-operating income | $25.2 million | $20.5 million | +22.9% |
| Income before income taxes | $91.3 million | $97.9 million | -6.7% |
| Net income | $58.0 million | $64.1 million | -9.5% |
| Net income available to common stockholders | $49.3 million | $55.4 million | -11.0% |
| Diluted earnings per common share | $3.49 | $3.90 | -10.5% |
| Cash provided by operating activities | $64.7 million | $82.8 million | -21.9% |
Net income margin was 7.6% of revenue, versus 8.3% in 2011; income before non-operating income was 8.7% of revenue, versus 10.0%. Salaries, wages and benefits were 56.1% of revenue, up from 55.4%. Year-end total assets were $920.2 million and stockholders’ equity was $659.7 million. Long-term debt was $10.0 million, with no revolving-credit borrowings.
At December 31, 2012, cash and cash equivalents were $66.7 million and marketable securities were $107.3 million. Separately, restricted cash was $11.6 million and restricted marketable securities were $135.2 million, principally held by insurance subsidiaries. NHC reported a $75 million revolving facility available for general corporate purposes, maturing October 23, 2013. Operating leases represented $471.8 million of disclosed future contractual obligations, including $33.7 million due within one year.
Capital spending and acquisitions used $31.2 million in investing cash flow, including $22.0 million for property and equipment and $7.5 million to acquire an additional Caris interest. Financing cash use was $27.8 million; NHC paid $30.8 million in common dividends, including a $1.00-per-share special dividend, and $8.7 million in preferred dividends.
Material changes and fourth-quarter results
- Revenue declined primarily from lower Medicare reimbursement and the January 2012 transfer of Solaris hospice operations to Caris. Solaris contributed $14.2 million of patient revenue in 2011; Caris earnings are reported in non-operating income. Increased revenue from assisted-living projects partly offset the decline.
- Average occupancy in owned and leased skilled nursing centers fell to 90.1% from 90.6% in 2011 and 92.0% in 2010. Medicare per-diem rates decreased 4.9% year over year; Medicaid and private-pay rates increased 1.4% and 3.5%, respectively.
- Reported pretax income fell 6.7%, but 2011 included a favorable $10.5 million accrued-risk-reserve result. Excluding that item, NHC said 2012 pretax income would have increased 4.5% versus 2011. Cost-saving measures and improved patient acuity mix helped mitigate reimbursement pressure.
- Fourth-quarter revenue was $194.0 million versus $192.7 million a year earlier; net income was $14.4 million versus $14.5 million. Basic EPS was $0.88 versus $0.89.
- Operating cash flow decreased by $18.1 million. Management attributed working-capital movements principally to higher restricted cash and receivables, lower accrued payroll, and higher accrued risk reserves and other current liabilities.
Outlook, risks and unusual items
- Management expected a 2013 effective tax rate of 35%–39%. No formal earnings or revenue guidance was provided in the supplied filing text.
- Planned projects included a 90-bed Tennessee facility expected to open in the third quarter of 2013, a 50-bed addition in South Carolina, and proposed developments in Tennessee, Georgia and Missouri with projected openings in 2014. A $21 million purchase of six leased skilled nursing centers from NHI was expected to close December 31, 2013; management said the purchase would reduce master-lease payments by $2.95 million in 2014.
- Medicare sequestration cuts of up to 2% were delayed until March 1, 2013; NHC could not predict their financial impact if implemented. CMS’s FY2013 skilled-nursing rate update was 1.8%, while NHC reported a 4.9% decrease in its average Medicare per diem rate for 2012. Home-health reimbursement changes were also a source of uncertainty.
- Material risks include dependence on government reimbursement, regulatory and certification compliance, labor availability and wage inflation, competition, and the potential for self-insured liability claims to exceed reserves or coverage. Accrued risk reserves rose to $110.3 million from $98.7 million.
- NHC faced a SeniorTrust lawsuit filed in September 2012 alleging, among other matters, fiduciary-duty breaches and adverse transactions; the company denies the claims. In January 2013, it received notice of a related ElderTrust lawsuit, which it also denies. The filing does not state a clear estimated loss or range for these lawsuits.
- The 2011 favorable reserve result and the 2012 $3.2 million tax benefit from statute-of-limitations expirations are notable nonrecurring items. The portfolio also carried substantial concentration in NHI: its shares represented 85.9% of NHC’s equity securities at year-end, with $67.4 million of the portfolio’s $77.1 million unrealized gains attributable to NHI.
Key facts for investors to verify
- Whether patient mix, occupancy and cost controls can offset Medicare rate pressure and lower reported revenue.
- Developments in the SeniorTrust and ElderTrust litigation, related management contracts and receivables, and any potential financial exposure.
- Claims development and actuarial assumptions underlying the $110.3 million accrued risk reserves.
- Renewal of the $75 million revolving credit facility before its October 2013 maturity, and funding needs for construction and the planned $21 million property purchase.
- Liquidity available after distinguishing unrestricted from restricted cash and securities, and the sustainability of common and preferred dividends.
- Concentration and valuation risk in NHI equity holdings, and the effect of market-price changes on reported equity and comprehensive income.